Incomes, Inequality and Welfare

Joe Hockey gave a speech on Wednesday of last week in which he proved the old adage that you can't dig your way out of a hole. After releasing a budget that patently promotes inequality, Mr Hockey continues to argue that the government's 2014-15 budget is fair and promotes equality.

The basic thrust of Mr Hockey's speech was that the Australian Government's role is to promote equality of opportunity, not opportunity of outcomes, as though this is not a common view of Australia's major political parties (see here and here). It is hard to understand how a government intent on cutting needs-based school funding, deregulating university fees and imposing a real rate of interest on student fee loans, when quality education is the best way to promote equality of opportunity, can argue that it is interested in equality of opportunity. Likewise, it is hard to see how imposing a user charge on visits to the doctor and cutting health funding will promote equality of opportunity. And it is hard to understand how crushing the unemployed by making them wait six months for assistance, which will then only last six months before cutting out, promotes equality of opportunity. Yet, Mr Hockey is all too willing to accuse anyone who questions the government's wisdom on these matters of engaging in "class warfare".

Mr Hockey presented a number of "facts" to make his case, which have since been pulled apart by more adroit and articulate econotypes. These have tended to regard Mr Hockey's claims about our supposedly broadly targeted, inefficient and unsustainable welfare programs. For example, Greg Jericho, writing today for the Guardian, and actually using meaningful facts, pointed out the numerous contradictions in Hockey's arguments, particularly:

Hilariously ... the very OECD report that [Hockey] cited shows that our welfare system is actually not too broad, but highly targeted. Indeed, his own statement gave it away. If our government is a much smaller part of the economy, and we spend less than other nations overall on welfare, but our lowest 20% get more welfare than others, then clearly our welfare system is much better targeted.

Matt Cowgill broke down what our welfare dollars are actually spent on, to provide crucial substance to Mr Hockey's grossly oversimplified "facts".

And, last but not least, First Dog on Moon explained the whole situation in a series of colourful boxes.

Then, today, the latest edition of the Household, Income and Labour Dynamics in Australia (HILDA) Survey was released by the Melbourne Institute, which has provided plenty more data to correct Mr Hockey's obviously political and misleading comments on equality and welfare spending.

The report, which is a unique, large-scale longitudinal study, provided plenty of good news on incomes and equality. To start with, it shows that our incomes are rising. As shown below, mean and median incomes have been rising over the period of the study. In addition, equivalised incomes¹ (which are adjusted for the particular "needs" of various household types) have also been rising, in both mean and median terms.

Total disposable hosuehold income (2011 dollars)

In what the report describes as a "rising tide lifts all boats" type of effect, the rising incomes seem to have applied across the board, with inequality measures showing little change over the decade. The graph below shows changes to the Gini coefficient over time (for the sample group of the study). Gini is a standard measure of inequality, where a score of 0 would mean that everyone has equal incomes and 1 would mean that one person collects all income.

Gini coefficient of household disposable income

Another measure of inequality considered by HILDA is a comparison of various percentiles. One is a comparison of the 90th percentile (that is, the person who earns more than 90 per cent of people but less than 10 per cent) and the median (that is, the person who earns more than 50 per cent of people but less than the other 50 per cent), expressed as a ratio of the 90th to the 50th (or median). The other is a comparison of the 50th percentile (the median) and the 10th percentile (the person who earns more than 10 per cent of people but less than 90 per cent), again, expressed as a ratio.

Basically, the blue line compares high income earners with middle income earners, and the red line compares middle income earners with low income earners. In both cases a higher ratio indicates greater inequality.

Percentile ratios

Both the Gini and percentile comparisons show little change in inequality, althought there is an increase from 2009. The authors of the report put this down to greater growth in high incomes than in middle and low, which is shown by the surge in the blue line above.

Interestingly, this relatively stable period (in terms of in/equality) has come at a time when there has generally been a rising inequality around the world. The table below shows the Gini coefficient for the OECD area, which shows a surge from 2000-2007 (at least half of the period covered by HILDA).

Increase in Gini coefficient, OECD average²

Just as a point of comparison, the graph below shows the Gini measure for OECD countries, as well as a comparison of the richest and poorest 10 per cent. Australia ranks relatively high in the inequality stakes.

Gini coefficient of household disposable income and ratio of richest to poorest 10% (2010)²

So, while inequality appears to be, generally, resisting the upward trend in the rest of the OECD, it is still relatively high. Our incomes of all levels are rising, but are we content with that? Or should we demand our government aim for a greater level of equality of outcomes by genuinly providing greater equality of opportunity?

And now we come to the measures in relation to welfare payments. Put simply, the results in this study blow Mr Hockey's claims about unsustainable and skyrocketing welfare payments out of the water. On all measures, welfare payments are decreasing. The graph below, copied directly from the HILDA report, shows a decline in all forms of welfare payments (apart from disability payments). There is a slight jump in income support around the time of the GFC, but it still doesn't reach the high of 4 per cent at the start of the study in 2001.

Receipt of each income support payment type (persons aged 18–64 years)

The graph below shows that the proportion of people aged 18 to 64 years receiving income support is dropping, apart from a very minor increase following the GFC, leaving the 2011 level still well below the starting point at 2001.

Receipt of income support payment among people aged 18–64 years, 2001 to 2011

And this graph (below) shows that less people are relying on welafre payments, measured by those who rely on it for 50 per cent and 90 per cent of their total disposable income.

Welfare reliance among people aged 18–64 years, 2001 to 2011
_____
¹The report defines equivalised income as "a measure of material living standards, obtained by adjusting household disposable income for the household’s ‘needs’. Most obviously, household of four persons a household of four persons will require a higher household income than a lone-person household for each household member to achieve the same living standard as the lone-person household."
²OECD Income Distribution Database